There is a serious myth doing the rounds that the retirement of Australia’s baby boomers will trigger a massive new wave of housing supply that will swamp incoming demand and depress prices.

This was exemplified in an article last week by the commercial property advocate Chris Lang. Without resorting to statistical evidence, Lang likely terrified many retirees with his sensational claim that if they didn’t get rid of their homes within the next 12 months they would have to wait until 2025:

Baby boomers are facing an enormous challenge. And the sad fact is that they are probably not even aware of the problem. You see, if they haven’t sold their traditional inner-suburban homes before 2012 they need to be prepared to hold onto them until 2025, because there simply won’t be a market for that type of property before then.

Based on the best available government forecasts, Lang’s statements are factually flawed and misleading. Indeed, the opposite is very likely true: over the next 15 years there will be a much larger absolute increase in the number of non-retirees (aged under 65) in Australia relative to those aged 65 years and over.

The ABS and BIS Shrapnel project that we will have a net increase of 3.7 million new people under 65, compared with 2 million retirees. This will result in 2.3 million new households added to Australia’s conurbations, which will need to buy or rent a home in which to live.

As I will show below, whether baby boomers decide to downsize or not will have no impact on this tsunami of population growth-driven housing demand.

A proper understanding of these issues requires one to dive into the data. And the starting point for any such analysis is, of course, population projections. Both the ABS and Treasury produce comprehensive estimates of Australia’s population change out to 2050.

One interesting characteristic of the ABS’s analysis is that it has consistently underestimated Australia’s population growth and has, as a consequence, been forced to repeatedly revise up its projections (see the first table).

In 2003, the ABS projected that there would be 26.4 million people living in Australia by the end of 2050 (today there are 22.7 million).

In 2005, it upgraded this base-case projection to 28.2 million. And then in 2008 it revised it again to 34.2 million. That is, a 30% increase over the 2003 numbers.

The Treasury then came along and threw a further spanner in the population works with its 2010 Intergenerational Report. Harnessing seemingly conservative assumptions, the Treasury concluded that we would, in fact, have 35.9 million residents living in Australia by 2050 (a stunning 36% increase over the ABS’s 2003 estimates, as illustrated in the next chart).

The bizarre thing about the Treasury analysis was that it presumed a very substantial slowdown in the pace of net overseas migration from our 249,000 per annum rate over recent years to just 180,000 per annum between 2012-2050. This is the reverse of what one would reasonably expect given Australia’s ageing population, which, Treasury forecasts, ultimately creates financial mayhem for the nation.

The Intergenerational Report tells us that there are currently five people of working age for every retiree. By 2050 Treasury thinks this will decline to 2.7 workers for every aged person.  At the same time that an ageing population is driving up the government’s health and pension costs, the number of workers in the economy paying taxes will shrink. This results in what Treasury euphemistically calls a “fiscal gap” from 2030 onwards: that is, government spending starts to exceed government revenues, which precipitates perpetual deficits and a sharp rise in government debt (see next two charts).

*This first appeared on Property Observer.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey